Fee for service pension consulting -- doomed?

[Dave Baker]

I hear people say that a pension consultant just can't make a go of it without taking commissions or other fees from investment providers.

What's the skinny on this? Are any fee-for-service providers thriving, especially in the small-plan market?

[Larry M]

yes, we have been successful in this field for a long time - strictly fee for service - and, except for the miserable #@!&$(&* regulations, enjoying most of it.

and there are a number of even more successful (financially) fee for service competitors in this area.

referral sources - attys, accts, other clients - seem to prefer the lack of the potential conflict associated with those who sell products.

[richard]

We have always been fee for service, but have observed the product-based consultants over the last 20 years.

To step out of the box, however, it is interesting that the trend in the investment industry, which has alway been commission-based, is to fee-based consulting. The fees sometimes are disguised commissions (the 1% of assets gets you 50 "free" trades), but sometimes they are legitimate fees (particularly from financial planners).

Now, sometimes they use these "fees" as a loss leader to sell traditional commission-based products, but some "experts" suggest using a financial planner to design the investment program, and actually invest elsewhere. That would be consistent with the idea of paying consulting fees for advice, and paying the actual cost of trading by using a discount broker.

Of course, some people refuse to pay fees at all ...

[Guest John Kelly]

I'm a recruiter in this market, so I talk to lots of consulting firms and package marketeers: Yes, there are a few consultants that remain purely fee-oriented and who appear to be prospering in regions with concentrations of middle-sized businesses.

None of the large consulting firms appear to be purely fee-oriented anymore, when you look closely at their alliances.

There appears to be little reason for *most* plan sponsors to pay for consulting services any more, when most of what they need is now provided for "free," essentially as a soft-dollar rebate by the broker-dealer or fund family.

There probably actually ARE reasons sponsors *should* pay fees for consulting services, but most don't know about them any more. That's the result of the anti-sales mindset of most consultants. Perhaps it's a right-brain/left-brain type of thing.

In any case, not many can profit by selling what others throw into the deal for free.

An interesting exception is the ultra-hot "wrap-fee" money management market to which most broker-dealers and wire-houses now direct 30-40% of their clients' assets.

Their customers are apparently willing to pay heavy fees for hand-holding around their most important assets. Perhaps if plan sponsors were as concerned with their employee's financial welfare, they would be willing to pay more in the way of consulting fees.

This lack of concern by plan sponsors is the direct fault of weak marketing by consulting firms. Who else could convey the message?

[Guest Robin Vatalaro]

You raise some interesting points. I work for a TPA firm that provides both ERISA/IRS/DOL compliance work and acts as agent/broker on a variety of investment products. We gain commissions from the investments and charge administrative consulting fees on top of it. In my opinion we have a highly qualified technical staff on the compliance side (and on the investment side too, but I work on the compliance side).

I have seen many companies come to us after an investment house that throws in compliance for free really messes up the plan. I recently worked on a company that had their investments w/ one of the biggest investment institutions in this country, who had compliance work done for free by this investment company. The investment company seemed unaware of compensation limits, top paid group (this was the 1995 plan year), compensation definitions, the fact that a plan w/ elig req'ts more generous than statutory can be disaggregated, etc etc etc. That's just a small fraction of everything that had been done wrong.

How do you explain to a potential client that it is worth it to pay consulting fees to competent people who know what they are doing? The client thinks "great the compliance can be done for free, why would we pay extra for it?" The potential client doesn't seem to care about the multitude of pitfalls and service issues that are common to 401(k) plans (the area I work in). I'd be curious how consultants out there are are getting this important message to a potential client. It seems to be very difficult.

[Guest John Kelly]

Yes, it's a challenge to sell a consultant's added complexities and expenses in the face of all those purportedly "free" services.

That's why few consulting firms survive on core services: Due to the innocence of business management skills by their officers (or owners), they rarely think it's necessary to hire or competitively pay professional sales people. If they were in any other business, they'd know to do that.

I can't tell you how many consulting firms try to use actuaries, unemployed brothers-in-law, failed insurance salesmen, boozed-up owners, and girlfriends as salespeople. It's the norm.

Consultants almost always believe that they are repositories of exquisitely subtle and important information, they think they're rabbis or gurus. They don't like to lower themselves to the mundane business level of their clients. The implications are obvious.

[Lorraine Dorsa]

We operate solely on a fee for service basis and have been successful. Specifically, we target clients for whom we can provide value added services (specialized plan design, administration of complex plans, defined benefit plans, etc) rather than what are perceived as "plain vanilla plans" (not that there is really such a thing given the complexity of pension law).

I've found many referral sources who appreciate having a pension plan professional who is not a competitor to whom to refer his clients.

I see fee for service pension consulting as a niche business--you just need to find the niche that needs your services and give up on those clients who think that because they do not receive a bill which says "pension consulting & administration" that someone is providing these services free.

[richard]

Since clients don't like to pay in cash what they could "pay for" in soft dollars, I wonder what firms that consult in other areas are doing. For example, accounting firms, general management consulting firms, operations consulting firms, software and Y2K firms, etc.

[Guest boetgerinc]

We are a TPA firm (17 employees, with 2 enrolled actuaries) in a small city. We are strictly fee for service, and do work for banks, trust companies, brokers, and direct to mutual funds where the company "self-trustees". We have no sales people and do not market our firm. Our business continues to be very good. Every time I think that new business will slow down, the banks kick their clients out of the trust department because their assets are too low, and they end up going to a no-load mutual fund company, and use our firm for administration. Our strengths are our independence, technicial knowledge, and we are local. We personally deliver our reports, which the employers like. We are having trouble developing a daily product, because we have to hand input prices, confirmations, etc. It is very hard to get into the "daily environment" without being tied into a mutual fund company. We continue to plug away, hopefully, in the future, full fee disclosure will only strengthen our position in the local market.